Johnson & Johnson (J&J) is battling approximately 40,000 lawsuits alleging that their talc products caused ovarian cancer and mesothelioma. According to Thomson Reuters, Johnson & Johnson has already spent $1 billion defending against the talcum powder claims.

In October 2021, as cases and costs mounted, Johnson & Johnson created a subsidiary to house the talc liabilities – LTL Management LLC – using the controversial Texas Two-Step legal strategy. The subsidiary then filed for bankruptcy to try to escape financial accountability for the cases and litigation.

What is Texas Two-Step?

The divisional merger strategy known as the Texas Two-Step relies on Texas law to create a brand-new company that usually has no business operations but can hold the parent company’s liabilities.

Step one involves scrambling the company’s organization chart and creating new business entities in Texas, which are then converted into two cousin companies that are both owned by the same parent company. In this case, Johnson & Johnson created a separate cousin entity, LTL Management LLC. One cousin entity inherited J&J’s main talc assets worth billions of dollars. The other cousin entity, LTL Management LLC, inherited all of the talc liabilities.

The second step of the maneuver involves the entity saddled with liabilities moving to a jurisdiction that’s favorable to the new entity filing for bankruptcy. Only 72 hours after LTL Management LLC was created, the entity switched from being a Texas company to being a North Carolina company, where such a bankruptcy maneuver has previously been accepted. Once LTL Management LLC was transferred to North Carolina, the company filed for bankruptcy.

However, U.S. Bankruptcy Judge Craig Whitley decided the bankruptcy case should be conducted in New Jersey, where Johnson & Johnson is headquartered, and a majority of the talc litigation is concentrated.

In November 2021, shortly after the case was transferred to New Jersey, Johnson & Johnson announced a plan to split its consumer health division that sells “Baby Powder” from its pharmaceutical business but claimed the split had nothing to do with the talc liabilities. Johnson & Johnson claims the split is intended to help the company focus on pharmaceuticals and medical devices.

U.S. Bankruptcy Judge Michael Kaplan will oversee the Chapter 11 bankruptcy case in New Jersey. A hearing to evaluate J&J’s bankruptcy strategy will occur in February 2022.

Texas Two-Step Practical Implications

Many people were shocked to learn that a Johnson & Johnson entity was filing for bankruptcy. Johnson & Johnson has a stock valuation of more than $400 billion and is one of only two companies with a perfect credit rating from S&P and Moody’s. Since Johnson & Johnson as a parent company is not bankrupt, it’s unusual that Johnson & Johnson is leaning on protections from a federal bankruptcy court.

Funding LTL Management LLC

Johnson & Johnson will fund LTL Management LLC for an amount the bankruptcy court will determine at a later date, establish a $2 billion trust to fund settlements, and allocate certain royalty revenue streams with a present value of over $350 million to further contribute to potential talcum powder litigation costs.

Although Johnson & Johnson will still be funding LTL Management LLC’s legal costs, the costs will likely be greatly reduced compared to fighting every single case individually. Johnson & Johnson’s commitment to providing $2 billion in litigation funding is also a predictable cost for shareholders compared to unpredictable litigation costs and jury verdicts.

Claimants’ Outrage

A group of attorneys representing talcum powder plaintiffs filed a statement with the U.S. Bankruptcy Court for the District of New Jersey where the Chapter 11 bankruptcy case is handled. The committee explained that Johnson & Johnson’s planned spinoff of the pharmaceutical giant’s consumer health division “would create further barriers between tort claimants and assets that should be available to satisfy claims.”

The committee thinks that, if Johnson & Johnson becomes two separate entities, disputes will arise over which entity will be obligated to fund an agreement in the LTL bankruptcy case. The committee also accused Johnson & Johnson of using the bankruptcy process as a litigation advantage to halt the talcum powder litigation and limit victims’ compensation.

Linda Lipsen from the American Association for Justice (AAJ) expressed her outrage over Johnson & Johnson’s bankruptcy strategy: “There are countless Americans suffering from cancer, or mourning the death of a loved one, because of the toxic baby powder that Johnson & Johnson put on the market that has made it one of the most profitable pharmaceutical corporations in the world. Their conduct and now bankruptcy gimmick is as despicable as it is brazen.”

Widespread Criticism of J&J

Critics of Johnson & Johnson’s legal maneuver say this is just another instance of a growing trend where corporations and wealthy individuals use bankruptcy to block lawsuits without the parent company actually having to file for bankruptcy itself.

Legal scholars, bipartisan members of Congress, and consumer advocacy groups have expressed their concerns about the wealthy and powerful entities using bankruptcy to block lawsuits. Critics explain that this strategy allows firms and organizations to receive the benefits of Chapter 11 protection without the entire company filing for bankruptcy. Additionally, critics explain that lax bankruptcy laws allow companies to venue shop (choose to file for bankruptcy in a federal jurisdiction that is seen as friendly to corporations to receive the most favorable results).

Johnson & Johnson’s Response

However, Johnson & Johnson has rebuked critiques of their legal maneuvers and affirmed the safety of their talc products in this statement: “Debtor (Johnson & Johnson) continues to stand behind the safety of its cosmetic talc and does not believe the claims have merit. The unfortunate reality is that this filing is necessitated by an unrelenting assault by the plaintiff trial bar, premised on the false allegation that the Debtor’s 100+-year-old talc products contain asbestos and cancer.”

Johnson & Johnson’s General Counsel, Michael Ullmann, explained that: “We are taking these actions to bring certainty to all parties involved in the cosmetic talc cases. While we continue to stand firmly behind the safety of our cosmetic talc products, we believe resolving this matter as quickly and efficiently as possible is in the best interests of the company and all stakeholders.”

How GoldenbergLaw Can Help You

If you or a loved one was diagnosed with ovarian cancer or mesothelioma after using Johnson & Johnson’s Baby Powder products, contact the Minnesota talcum powder attorneys at GoldenbergLaw. Our team has more than 35 years of experience getting justice for our clients and providing the Gold Standard of advocacy. Contact us today for a free consultation!

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